What is an annuity?
An annuity is a financial product that gives you a regular, guaranteed income when you retire that will be paid for the rest of your life. People usually buy one with money from their pension pot.
You can only buy an annuity when you’re 55 or older, or 57+ from April 2028. Once you’ve set one up you can’t make any changes to it.
Annuity calculator
It’s simple to use, and provides a helpful estimate of your potential guaranteed income in retirement.
What does annuity mean?
Once an annuity's up and running you'll start getting regular, guaranteed payments. You agree how much those payments will be when you set up your annuity. Different providers will offer different annuity rates, so it’s always worth shopping around. Our annuity rates article will tell you more.
But the meaning of annuity is more than just financial. Because of those guaranteed payments, the real annuity meaning is often just… peace of mind. In this article we'll be looking at how a lifetime annuity works. You could also consider a fixed-term annuity, which works a bit differently.
What are your annuity options?
When you’re thinking about your annuity options, it could also be worth considering other guaranteed income products that work in a similar way to annuities but run for a fixed term only. Although they’re not technically annuities, they’re often known as ‘fixed term annuities’.
Your annuity or fixed term product payments can:
- Last for the rest of your life or for a fixed period only
- Fixed term products usually last for between three and 25 years
- Some fixed term products also pay out a lump sum when they end
- Rise over the life of your annuity
- This will help your income keep up with inflation
- Bear in mind that your starting rate will be lower
- Look after a loved one after you die
- Keep paying them for a fixed period or the rest of their life
- Pay them a one-off lump sum
Depending on the product or provider you go for, you should be able to choose between all of those (and possibly other) choices.
Is an annuity a good idea?
An annuity can be a good idea because:
- Annuity rates have risen in the last few years, making them more attractive
- They’re well-established products giving a completely reliable guaranteed income
- You can choose between different annuity benefits and providers
- Make sure you shop around before buying!
What are the downsides of annuities?
Annuity downsides can include:
- Once you’ve made your choices and set up your annuity, you can’t change it
- When you die your annuity will stop paying out, unless you choose to:
- switch some or all of your payments to a loved one
- pay out a lump sum to them
- Annuity rates vary and other retirement income products might pay out more
- Explore your product options with our Retirement Income Calculator
And of course if you’re worried about annuity downsides, it’s very important to shop around and make sure you fully understand your other retirement income choices. You should only buy an annuity once you’re absolutely sure that it’s the right choice for you.
How much does an annuity cost?
Understanding what kind of retirement income you could get for your pension pot is an important part of retirement planning. We look at what you could get for your pot.
What happens to an annuity when you die?
When you die, annuities usually just stop paying out. But when you’re setting up your annuity you might be able to ask your provider to make other arrangements. After you die, they could:
- Switch some or all of your payments to a loved one
- Pay out a lump sum to them
To find out more, check out our What happens to annuities when you die article.
What should I do next?
This article is very much a starter for ten. To dig deeper, you can:
- Find out how much our products could pay you with our Annuity Calculator
- Read our Guide to getting an annuity quote online
- Get quotes from across the whole market at our Annuity Ready site
- Get free guidance at the Government’s Pension Wise site
- Find an independent financial adviser at the Unbiased site
- We also offer a Retirement Advice service for over 55s
FAQs
HMRC treats any annuity income you receive as part of your taxable income, which also includes your State Pension. Any money you get above your personal allowance is taxable. The amount of tax you pay will depend on your personal circumstances and may change in the future.
People often talk about annuities meaning just a lifetime annuity. In fact, you can choose between many different types of annuity. Each has its own specific benefits – the full list is:
- Lifetime annuities
- Fixed term annuities
- Joint lifetime annuities
- Enhanced annuities
- Deferred annuities
- Variable annuities
- Immediate needs annuities
- Purchased life annuities
We talk through them all in detail in our Types of annuity article.
A pension is a tax-efficient way of investing for your retirement, often with the help of your employer or the government. As you invest in your pension you build up your pension pot.
When the time comes to retire, you can spend some or all of your pension pot on an annuity. An annuity gives you a guaranteed income for the rest of your life or for a fixed period.
To find out more about annuities, take a look at our How annuities work article.
As with any financial decision, it depends on your goals and circumstances. For an in-depth comparison of the two types of product, check out our Annuity vs drawdown article.
Related articles
Annuity vs drawdown – what's the difference?
Enhanced annuities explained
Types of annuity
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